“May you live in interesting times.”—Chinese curse
COVID-19 (1.51 million U.S. cases; 80,754 deaths, as of May 16) in March and April had larger, more rapid economic, labor, and energy market impacts in the U.S. than anything in history and has turned politics upside down. Events have occurred which, had you predicted them as recently as February, would have had you labeled as seriously deluded.
In less than four weeks, 30 million people filed for unemployment compensation, and millions more were unable to file, due to the filing systems’ collapse in many states. More jobs were lost than were created over the past decade. Adding those people ineligible to file (gig workers, etc.,) and those who were already unemployed, indicates that U.S. unemployment currently exceeds 30 million, nearly 20%—the worst since the Great Depression of the 1930s.
Economic consequences. The U.S. economy is in free-fall, and the nation is in a deep recession/depression, with estimates that GDP may be 15% to 20% lower in the second quarter than the first—the most severe drop ever. Entire sectors, such as restaurants, hotels, travel and entertainment, are in an induced coma, and an estimated 90% of small businesses are impacted—many are closed and facing bankruptcy. In a matter of days, the stock market changed from reaching its highest level in history to crashing into bear territory, and it has gyrated widely ever since. The impact on the oil and gas (O&G) industry has been catastrophic, with many shale producers facing insolvency and the price of oil dumping into negative territory before recovering into the low twin digits.
Federal funds. The federal government has intervened massively, and between Congress and the Federal Reserve, has committed well over $6 trillion—and increasing rapidly. This represents an astounding 1/3 of GDP with no end in sight, but with limited success. A series of emergency “rescue” packages was enacted in record time, culminating in the $2.2-trillion CARES Act, which provides funds to individuals, industries, and small businesses, and much more stimulus spending is impending. Huge amounts were allocated to favored sectors, such as airlines, farmers, “strategic” industries (e.g. Boeing), and others. A centerpiece was $350 billion allocated to small businesses, which turned out to be embarrassing.
All of these federally guaranteed funds were committed within days—banks favored their own customers, who owed banks money; “small businesses” such as Ruth’s Chris Steak House (over 5,700 employees) received large payouts; and few truly small businesses actually received payments. Congress is placing an additional $300 billion into the program.
Political fall-out. The politics are head-spinning. Small government/deficit hawk politicians fell over themselves to rapidly inject trillions of borrowed dollars into the economy, with much of it going in direct payments to individuals: $1,500/adult and $500/child for families earning less than $99,000/yr. Both Democrats and Republicans are desperately trying to avoid the backlash that accompanied the 2008-2009 Troubled Asset Relief Program that was widely perceived as “bailing out Wall Street instead of Main Street.”
The parties, Congress, and the White House are (naturally) fighting over who will be getting more money, how much, and how soon, but the unprecedented spending spree will continue unabated. After all, there is an election coming up in less than six months that will decide the Presidency, both houses of Congress, and likely the Supreme Court. Meanwhile, state and local government tax revenues have collapsed, forcing them to reduce services. Ironically, this has caused additional problems for persons seeking unemployment compensation.
O&G left on its own. The situation for the energy industries is dire and likely to get worse. Oil and gas prices have cratered, and electric power sales are at a 30-year low. Liquid fuel demand has collapsed: Airline travel is down more than 90%, and people sequestered are not driving. While the largest industry players may survive, many smaller ones will not and may be driven out of business by their larger, better-funded rivals. While this may represent some form of survival of the fittest, the implications for the U.S. O&G industry, and for U.S. energy production and energy security, are ominous. Thus far, the federal government has been hesitant to act, and while some state agencies may intervene, the Texas Railroad Commission has chosen not to do so.
The prospects for recovery depend on how quickly the virus’ spread can be controlled and how rapidly, thereafter, the economy recovers. There is a spirited debate among epidemiologists, economists and politicians over how, and how soon, to ease lockdown restrictions. The best that can be hoped for is a phased restarting of activity beginning in the May-July timeframe. Thereafter, it is not clear whether the recovery will be the hoped for “V”-shaped or will be “U”-shaped, or even “L”-shaped.
Given the impending elections, one thing for certain is that the political implications of all of this are profound. As to what they will be, no one knows, since we are truly in unchartered waters. Finally, the usual suspects have identified a silver lining: COVID-19 has shown how rapidly CO2 emissions can be decreased, and this bodes well for policies to combat climate change. Well, actually, the implications are clear. Policies advocated for drastically reducing CO2 emissions will cause economic disaster and intolerable levels of unemployment, and must therefore be avoided.
